HOW TO CHOOSE THE RIGHT ENTRY MODE FOR INTERNATIONAL DEVELOPMENT ?
To “Go Global” is a challenge for entrepreneurs. Amongst all issues, how to enter a market is always a brain-wrecking question that has no universal answer. This article by La Fabrique de l’Exportation will provide you a reasonable approach to find the best solution to your specific situation. Hope you’ll enjoy the read!
Question your entry mode
Most SMEs tend to seize any opportunities without thinking about associated entry mode. For example, try to sell directly to Brazilian contacts without questioning if this is really the best way to succeed in Brazil. Questioning your entry mode alone is already a good sign, and for a company who wants to expand internationally, the choice of entry mode is a key success factor.
Regarding international entry mode, not only is there no single solution, but solutions may also vary from one country to another and/or from one sector to another. Thus the choice of entry modes not only depends on the country and the market concerned, but also on the company’s strategy as well as the financial and human resources it can mobilize for export activity.
Beware of low cost strategies
There exist low-cost strategies, which involve finding an agent or distributor and signing a contract, with neither prior market research nor thoughtful strategy/reflection on the choice of country and mode of entry, in hope that “the export dream will come true”. These strategies requires fewer resources but also produce very few results: most often, there’s no miracle and a few months later, the agent or distributor doesn’t sell anything. The company then ends up wasting time on marginalizing, while at the same time other companies have already succeeded with good strategies and taken the markets over.
Opt for reasonable approaches
To avoid the cost of failure, there are other strategies, less “low cost” and above all more reasonable. They are more expensive because they include market research and the use of experts, specialized lawyers to secure contracts. But these strategies generally ensure solid return on investment. However, the investment must also be cost-effective, making export the most cost-effective possible.
Consider alternatives regarding the company’s competence
Each entry mode requires specific skills from the company: selling via a an international trading company does not require the same competence as having a franchise abroad. For each mode of entry possible, first thing is to weigh skills required and skills possessed; and for each task, ask: do I know how to do it today, or will I learn the know-how with reasonable amount of efforts and within acceptable time frame. This analysis does not necessarily give you the best answer, but it will eliminate modes that are beyond the company’s competence. In case of lacking skills, the modes of entry associating a high level of outsourcing may be the solution.
Consider necessary investments in resources
Similarly, each mode of entry corresponds to a certain level of financial commitment and (shared) risk exposure. It is, of course, also necessary to weigh the investments required for each mode of entry against the resources that the company can and reasonably wishes to mobilize to develop its activity abroad. Entry modes that consume more cash – flow (e.g. creation of a commercial subsidiary) should be ruled out in case of limited financial resource corresponding to this type of risk-taking decision. Cost assessment needs to cover exit strategies in the event of failure (e.g. liquidation cost of a subsidiary).
Learn to work with foreign partners
In case of success, an inter-company partnership can be a good solution because it generate durable development. Even if finding a trusted partner in a foreign country can turn out to be very difficult, the presence of a “regional representative” can be an important factor in developing the business. A well-framed joint venture may, for example, be more suitable than a proprietary subsidiary, especially when it comes to recruiting talented collaborators. However, you have to learn to work in trust with a foreign partner, to create a relationship of trust and guarantees for both parties. It is this learning process that is often ignored by SMEs, diverting them from the entry mode of establishing a partnership.
Take account of market specificity
The juridical security of contracts and payments is an important problem in many African markets. Taxes on imported products from such countries like China can make the price prohibitive. Other markets like Cuba require special financial packages. These are all country-specific parameters that should be incorporated into internationalization strategy.
Integrate digital solutions
E-commerce offers a new entry mode for SMEs by allowing direct sales to customers (BtoC or BtoB) on their own sites or on a market place. It is a mode where the company is not dependent on a foreign partner, where cashing process is direct and at will – aspects that should please and suit SMEs. It is now a very powerful mode of entry to the international market, within the reach of even smaller companies. It is still necessary have a digital showcase and/or the ability to access an e-commerce platforms. The acquisition of this digital competence is today a major subject for SMEs.
Want to contact La Fabrique de l’Exportation ? Tell us about your project through the Smart Connector and we’ll take care of the introductions!
To read more on the same issue in the context of Gulf countries, take a look at our Chief Marketing – Hicham Bahsoun ‘s in-depth article here.